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CONESVILLE COAL PREPARATION COMPANY
Page
CONTENTS
Statements of Income and Statements of Retained Earnings . . 1
Balance Sheets . . . . . . . . . . . . 2
Statements of Cash Flows . . . . . . . . . . 3
Notes to Financial Statements . . . . . . . . 4-9
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CONESVILLE COAL PREPARATION COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES -
Services to Parent Company. . . . . . $9,481 $9,831 $8,613
OPERATING EXPENSES . . . . . . . . . . 9,394 9,718 8,563
OPERATING INCOME . . . . . . . . . . . 87 113 50
NONOPERATING INCOME. . . . . . . . . . 41 9 7
INCOME BEFORE INTEREST CHARGES . . . . 128 122 57
INTEREST CHARGES . . . . . . . . . . . 6 - 1
INCOME BEFORE FEDERAL INCOME TAXES . . 122 122 56
FEDERAL INCOME TAX EXPENSE (CREDIT). . 52 52 (14)
NET INCOME . . . . . . . . . . . . . . $ 70 $ 70 $ 70
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STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . $820 $750 $680
NET INCOME . . . . . . . . . . . . . . 70 70 70
RETAINED EARNINGS DECEMBER 31. . . . . $890 $820 $750
See Notes to Financial Statements.
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CONESVILLE COAL PREPARATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1998 1997
(in thousands)
<S> <C> <C>
ASSETS
PREPARATION PLANT IN SERVICE. . . . . . . . . . . . $ 293 $ 310
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . 810 76
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . 18 42
Accounts Receivable:
General . . . . . . . . . . . . . . . . . . . . 6 29
Affiliated Companies. . . . . . . . . . . . . . 923 2,823
Materials and Supplies - at average cost. . . . . 817 810
Other . . . . . . . . . . . . . . . . . . . . . . 11 17
TOTAL CURRENT ASSETS. . . . . . . . . . . 1,775 3,721
DEFERRED FEDERAL INCOME TAXES . . . . . . . . . . . 691 704
REGULATORY ASSETS . . . . . . . . . . . . . . . . . 284 298
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . 1,500 59
TOTAL . . . . . . . . . . . . . . . . . $5,353 $5,168
CAPITALIZATION AND LIABILITIES
SHAREHOLDER'S EQUITY:
Common Stock - Par Value $1,000:
Authorized - 500 Shares
Outstanding - 100 Shares. . . . . . . . . . . . $ 100 $ 100
Paid-in Capital . . . . . . . . . . . . . . . . . 400 400
Retained Earnings . . . . . . . . . . . . . . . . 890 820
TOTAL SHAREHOLDER'S EQUITY. . . . . . . . . 1,390 1,320
OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . 1,376 1,156
CURRENT LIABILITIES:
Accounts Payable - General. . . . . . . . . . . . 206 233
Accounts Payable - Affiliated Companies . . . . . 295 154
Accrued Rentals . . . . . . . . . . . . . . . . . 890 896
Other . . . . . . . . . . . . . . . . . . . . . . 434 462
TOTAL CURRENT LIABILITIES . . . . . . . . . 1,825 1,745
DEFERRED GAIN ON SALE OF PLANT. . . . . . . . . . . 710 947
REGULATORY LIABILITIES. . . . . . . . . . . . . . . 52 -
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL . . . . . . . . . . . . . . . . . . $5,353 $5,168
See Notes to Financial Statements.
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CONESVILLE COAL PREPARATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . $ 70 $ 70 $ 70
Adjustments for Noncash Items:
Depreciation . . . . . . . . . . . 29 27 27
Deferred Federal Income Taxes. . . 57 21 30
Amortization of Deferred
Gain on Sale of Plant . . . . . . (237) (236) (237)
Accrued Other Postretirement
Benefits. . . . . . . . . . . . . 200 298 144
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable. . . . . . . . 1,923 158 (409)
Materials and Supplies . . . . . . (7) 98 (28)
Accounts Payable . . . . . . . . . 114 (232) 277
Payment of Disputed Tax and
Interest Related to COLI. . . . . . (705) - -
Other (net). . . . . . . . . . . . . (1,463) (181) 148
Net Cash Flows From (Used For)
Operating Activities . . . . (19) 23 22
INVESTING ACTIVITIES -
Construction Expenditures . . . . . . (5) - (21)
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . (24) 23 1
Cash and Cash Equivalents January 1. . 42 19 18
Cash and Cash Equivalents December 31. $ 18 $ 42 $ 19
See Notes to Financial Statements.
</TABLE>
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CONESVILLE COAL PREPARATION COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Regulation
Conesville Coal Preparation Company (the Company or CCPC), is a wholly-owned
subsidiary of Columbus Southern Power Company (CSPCo), which is a
subsidiary of American Electric Power Company, Inc. (AEP Co., Inc.), a
public utility holding company. The Company provides coal washing
services to CSPCo's Conesville generating plant. Coal washing prices are
regulated by the Securities and Exchange Commission (SEC) under the Public
Utility Holding Company Act of 1935 (1935 Act). Prices billed in
connection with coal washing services are sufficient to recover expenses
and provide for a return on CSPCo's equity investment excluding retained
earnings.
Basis of Accounting
As a cost-based rate-regulated entity, CCPC's financial statements reflect
the actions of regulators that may result in the recognition of revenues
and expenses in different time periods than enterprises that are not rate
regulated. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," regulatory assets (deferred expenses) and regulatory
liabilities (deferred income) are recorded to reflect the economic effects
of regulation. Such deferrals are amortized commensurate with their
inclusion in billings to CSPCo.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires in certain instances the use of
management s estimates. Actual results could differ from those estimates.
Coal Washing Agreement
Pursuant to a coal washing agreement with CSPCo, the Company is obligated
to provide coal washing services to CSPCo and entitled to receive payment
for all costs incurred, even under circumstances when such services are
not performed due to a natural disaster, labor unrest or any other forced
or voluntary cessation of operations, either temporary or permanent.
Preparation Plant
Preparation plant is stated at original cost and consists primarily of
assets under capital leases net of accumulated amortization.
Cash and Cash Equivalents
Cash and cash equivalents include temporary cash investments with original
maturities of three months or less.
Inventories
Materials and supplies inventories are stated at cost, determined on a
moving-average basis.
Income Taxes
The Company follows the liability method of accounting for income taxes as
prescribed by SFAS 109, "Accounting for Income Taxes." Under the
liability method, deferred income taxes are provided for all temporary
differences between book cost and tax basis of assets and liabilities
which will result in a future tax consequence. Where the flow-through
method of accounting for temporary differences is reflected in the
Company's billings and CSPCo's fuel rates, deferred income taxes are
recorded with related regulatory assets and liabilities in accordance with
SFAS 71.
2. COMMITMENTS AND CONTINGENCIES
Construction expenditures for the years 1999 through 2001 are estimated to
be $648,000 and, in connection with a construction program, commitments
have been made.
Litigation
The Internal Revenue Service (IRS) agents auditing the AEP System's
consolidated federal income tax returns for the years 1991 to 1993
requested a ruling from their National Office that certain interest
deductions claimed by the Company relating to AEP's corporate owned life
insurance (COLI) program should not be allowed. As a result of a suit
filed by the Company in US District Court (discussed below) this request
for ruling was withdrawn by the IRS agents. Adjustments have been or will
be proposed by the IRS disallowing COLI interest deductions for taxable
years 1991-96.
In 1998 the Company made payments of taxes and interest attributable to
COLI interest deductions for taxable years 1991-97 to avoid the potential
assessment by the IRS of any additional above market rate interest on the
contested amount. The payments to the IRS are included on the balance
sheet in other property and investments pending the resolution of this
matter. The Company will seek refund, either administratively or through
litigation, of all amounts paid plus interest. In order to resolve this
issue without further delay, on March 24, 1998, the Company filed suit
against the US in the US District Court for the Southern District of Ohio.
Management believes that it has a meritorious position and will vigorously
pursue this lawsuit. A disallowance of the COLI interest deductions
through December 31, 1998 would total approximately $763,000 (including
interest). In the event the resolution of this matter is unfavorable, the
Company expects to recover from CSPCo all of its costs under the terms of
the coal washing agreement.
The Company is involved in a number of other legal proceedings and claims.
While management is unable to predict the ultimate outcome of litigation,
it is not expected that the resolution of these matters will have a
material adverse effect on the results of operations, cash flows or
financial condition.
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The Company recovers all costs from CSPCo under the SEC
approved coal washing agreement.
3. OTHER RELATED-PARTY TRANSACTIONS
American Electric Power Service Corporation (AEPSC) provides certain
managerial and professional services to AEP System companies including
CCPC. The costs of the services are billed by AEPSC on a direct-charge
basis to the extent practicable and on reasonable bases of proration for
indirect costs. The charges for services are made at cost and include no
compensation for the use of equity capital, which is furnished to AEPSC by
AEP Co., Inc. Billings from AEPSC are capitalized or expensed depending
on the nature of the services rendered. AEPSC and its billings are
subject to the regulations of the SEC under the 1935 Act.
4. BENEFIT PLANS
The Company participates in the United Mine Workers of America (UMWA)
pension plan, a defined contribution plan which covers its UMWA employees.
Contributions totaled $23,000 in 1998, $39,000 in 1997 and $32,000 in
1996. As of June 30, 1998, the UMWA actuary estimates that the Company's
share of the UMWA pension plans unfunded vested liabilities was
approximately $580,000. In the event the Company ceases or significantly
reduces mining operations or contributions to the UMWA pension plans, a
withdrawal obligation may be triggered for all or a portion of its share
of the unfunded vested liability.
The Company participates in the AEP System qualified pension plan, a
defined benefit plan which covers all employees, except participants in
the UMWA pension plans. Net pension costs for the years ended December
31, 1998, 1997 and 1996 were $17,000, $19,000 and $22,000, respectively.
A defined contribution employee savings plan offered to non-UMWA employees
required that the Company make contributions to the plan totaling $19,000
in 1998, 1997 and 1996.
Postretirement medical benefits for the Company's UMWA employees who have
retired or will retire after January 1, 1976 (post 1975 UMWA retirees) are
the liability of the Company. The AEP System provides certain other
benefits for retired employees under an AEP System plan. The annual
accrued costs for these plans were $278,000 in 1998, $230,000 in 1997 and
$244,000 in 1996.
The Energy Policy Act of 1992 (Energy Act) permits recovery of excess
Black Lung Trust funds of the AEP System to pay certain postretirement
medical benefits under one of the UMWA health plans. Reimbursement
limitations apply to the System's excess funding. The Company has a fund
surplus that it is able to transfer to other AEP System companies that are
members of the fund and have a deficit. In June 1998 management decided
to cease reimbursing retiree medical costs due to the reduced levels of
available Black Lung surplus and proposed new rules that could liberalize
the current claims process. In 1998 $18,000, in 1997 $34,000 and in 1996
$36,000 of Black Lung surplus was utilized in accordance with the Energy
Act to reimburse the Company for benefits paid. The Company's share of
the Black Lung Trust funds surplus at December 31, 1998, 1997 and 1996 was
$33,000, $2,000 and $13,000, respectively.
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5. FEDERAL INCOME TAXES
The details of federal income taxes are as follows:
Year Ended December 31,
1998 1997 1996
(in thousands)
Current (net). . . . . . . . . . . . . . . $(5) $31 $(44)
Deferred (net) . . . . . . . . . . . . . . 57 21 30
Total Federal Income Taxes . . . . . . . $52 $52 $(14)
Federal income taxes as reported are different from pre-tax book income
multiplied by the statutory tax rate predominantly due to non-taxable
effects of corporate owned life insurance and the reversal of deferred
taxes recorded in prior years at tax rates different than the current
statutory tax rate.
The Company joins in the filing of a consolidated federal income tax
return with its affiliated companies in the AEP System. The allocation of
the AEP System's current consolidated federal income tax to the System
companies is in accordance with SEC rules under the 1935 Act. These rules
permit the allocation of the benefit of current tax losses to the System
companies giving rise to them in determining their current tax expense.
The tax loss of the System parent company, AEP Co., Inc., is allocated to
its subsidiaries with taxable income. With the exception of the loss of
the parent company, the method of allocation approximates a separate
return result for each company in the consolidated group.
The Company has settled with the IRS all issues from the audits of the
consolidated federal income tax returns for the years prior to 1991.
Returns for the years 1991 through 1996 are presently being audited by the
IRS. With the exception of the deductibility of interest deductions
related to AEP's corporate owned life insurance program, which are
discussed under the heading, Litigation, in Note 2, management is not
aware of any issues from open tax years that upon final resolution are
expected to have a material adverse effect on results of operations.
The following tables show the elements of the net deferred tax asset and
the significant temporary differences giving rise to such deferrals:
December 31,
1998 1997
(in thousands)
Deferred Tax Assets. . . . . . . . . . . . . . $ 833 $ 806
Deferred Tax Liabilities . . . . . . . . . . . (142) (102)
Net Deferred Tax Asset . . . . . . . . . . . $ 691 $ 704
Deferred Book Gain - Sale/Leaseback of Plant . $249 $331
Amounts Due From Customers
For Future Federal Income Taxes . . . . . . . (46) (61)
Accrued Postretirement Expense . . . . . . . . 390 318
All Other (net) . . . . . . . . . . . . . . . 98 116
Total Net Deferred Tax Asset . . . . . . . . $691 $704
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6. SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid in 1998 was $6,000. There were no interest charges paid in
1997 and 1996. Cash paid (received) for income taxes was $70,000 in 1998,
$54,000 in 1997 and $(32,000) in 1996. Noncash acquisitions under capital
leases were $79,000 in 1998, $44,000 in 1997 and $23,000 in 1996.
7. LEASES
Leases of property, plant and equipment are for periods of up to 15 years
and require payments of related property taxes, maintenance and operating
costs. The majority of the leases have purchase or renewal options and
will be renewed or replaced by other leases as long as coal washing
operations continue.
Lease rentals for both operating and capital leases are generally charged
to operating expenses. The components of rental cost are as follows:
Year Ended December 31,
1998 1997 1996
(in thousands)
Operating Leases . . . . . . . . . . . . $3,468 $3,468 $3,470
Amortization of Capital Leases . . . . . 71 57 96
Interest on Capital Leases . . . . . . . 11 12 18
Total Rental Costs . . . . . . . . . $3,550 $3,537 $3,584
Properties under capital leases and related obligations recorded on the
balance sheet are as follows:
December 31,
1998 1997
(in thousands)
Preparation Plant Under Capital Leases . . . . . . $502 $461
Accumulated Provision for Amortization . . . . . . 348 315
Net Property under Capital Leases . . . . . . . $154 $146
Capital Lease Obligation:
Noncurrent Liability . . . . . . . . . . . . . . $ 98 $ 85
Liability Due Within One Year. . . . . . . . . . 56 61
Total Capital Lease Obligations . . . . . . . . $154 $146
Capital lease obligations are included in other noncurrent liabilities and
other current liabilities on the balance sheets.
Properties under operating leases and related obligations are not included
in the balance sheet.
The Company sold its preparation plant and began a 15-year leaseback in
1986. The gain on the sale/leaseback is being amortized (approximately
$19,700 a month) over the life of the lease and is recorded as a reduction
to operating expenses.
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Future minimum lease rentals consisted of the following at December 31,
1998:
Non-
Cancelable
Capital Operating
Leases Leases
(in thousands)
1999. . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 3,468
2000. . . . . . . . . . . . . . . . . . . . . . . . . 46 3,468
2001. . . . . . . . . . . . . . . . . . . . . . . . . 29 3,468
2002. . . . . . . . . . . . . . . . . . . . . . . . . 20 -
2003. . . . . . . . . . . . . . . . . . . . . . . . . 12 -
Total Future Minimum Lease Rentals. . . . . . . . . . 170 $10,404
Less Estimated Interest Element . . . . . . . . . . . 16
Estimated Present Value of Future Minimum
Lease Rentals. . . . . . . . . . . . . . . . . . . . $154
